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The Changing Face of Trucking: Part I

Once upon a time, you had truckload companies, less-than-truckload companies, warehousing/logistics companies, rail intermodal companies, port drayage companies, and brokers. But today, the lines are blurring.

Supply chain pressures and other factors have meant big changes at many large transportation companies, such as Schneider, which now has a growing regional operation.

J.B. Hunt, a pioneer of the truckload business, now generates about three-quarters of its total operating income from intermodal operations. Go to Schneider National's web site, and you'll see a slide show of not only Schneider tractors and trailers, but also trains, planes, ships, forklifts, warehouses, computers, and stacks of intermodal containers - and it's growing its new regional fleet to 2,500 drivers this year. LTL giant Con-way now boasts a truckload division and two divisions that broker loads. FedEx, once known only for its overnight packages, now offers customers LTL, truckload, expedited and more. Average length of haul for big truckload carriers is dropping, while it's rising for the smaller guys.

There are a number of factors at work. In an industry known for tight margins, some companies are turning to diversification to improve the bottom line. Some analysts say the truckload model is simply broken, and LTL hasn't been faring any better. And then there's the question of how the industry may change coming out of the recession and facing tighter government restrictions.

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"Some of the strategic drivers that will unfold as the current decade develops could create a much stronger environment for many surviving transportation and logistics companies," says John Larkin, managing director of the Stifel Nicolaus Transportation & Logistics Research Group.

Changing supply chain

Most everyone agrees that a changing supply chain is driving changes in truck transportation.

"Anyone in business has to continue to reinvent themselves to find better ways of doing things," says Marc Rogers, senior vice president/general manager of Schneider's truckload division. "All these moves are about how to drive waste out of the supply chain, whether it's warehouse space or fuel or prices or transit time."

The Stifel Nicolaus analysts expect this decade to see a gradual reversal of the globalization megatrend. Many manufacturers are pulling back manufacturing from Asia and other low-cost countries to North America. A transportation system that has been built to distribute products produced overseas may have to be modified to support a return to shorter supply chains consisting of more and varied links.

Another major change is that products and packages are being redesigned to save weight and space, with Walmart leading the way.

Thom Williams, a former transportation executive and now an analyst as the principal of AmherstAlphaAdvisors, remembers visiting Procter & Gamble when they were a customer about seven years ago and running into a group from Walmart who was also visiting that day. Invited to sit in on the meetings, Williams watched as the Walmart representatives lined up a variety of different packages of food and household supplies down the middle of the conference table and asked P&G how they could get those items into smaller packages. They said they wanted to maximize their most valuable commodity, shelf space, reduce handling and warehousing costs, and, of course, transportation costs.

Larkin says anecdotes abound suggesting that one supplier or another has been able to load 30 percent more units on a standard 53-foot trailer or domestic intermodal container. "These sorts of initiatives, as with the shortening of supply chains tend to reduce the number of ton-miles generated on a permanent basis."

Diversification

"In truckload, we continue to see a lot of fleet downsizing and redeployment," says John Larkin. "That speaks to large carriers deciding the traditional long-haul truckload market is not a place they want to be."

In the past decade, some companies have been very successful in diversifying their service offerings, especially expansion into non-asset-intensive services, to offer "one-stop shopping" for shippers. Other companies have tried this and failed. And Larkin says a "me-too" mentality of fleets rushing into these areas could be a mistake for some.

"With some non-asset-based companies generating attractive financial profiles, most are diversifying into what soon may become over-served markets (e.g., truck brokerage). Ironically, it may be those that stick to their knitting that have the last laugh," he says, "as eventually someone has to actually own and operate the transportation asset."

In fact, Larkin and his associates believe that the next decade "will prove our thesis that superior returns will be enjoyed by those carriers that stay focused on their core service offering and, in doing so, generate a superior cost structure and superior value propositions for their customers."

On the other hand, Williams believes the industry hasn't changed enough. The sharp delineations that have traditionally defined the U.S. transportation market - truckload, LTL, rail intermodal, freight brokers, freight forwarders, 3PLs - "do not exist outside of the United States," he says. "In Europe, and in Asia, and in the Pacific and Australia and the Middle East, they're all one and the same." Big companies such as DHL and D.B. Schenker and Agility Logistics provide global logistics services, including trucking, intermodal, warehousing, forwarding, brokerage, etc.

Intermodal

J.B. Hunt Transport is generating per-truck revenues and operating income with its emphasis on intermodal that "are far, far above the heights that would cause any experienced trucker to drool with financial envy," says Williams. According to Stifel Nicolaus, a new deal the carrier signed with Norfolk Southern late last year could position J.B. Hunt to grow its eastern intermodal business at double-digit rates.

Schneider is another big player in intermodal, recently converting its entire intermodal fleet to intermodal containers, rather than piggyback trailers. Swift Transportation is another; according to its web site, its intermodal fleet includes 4,300 53-foot containers, and a domestic fleet of over 45,000 53-foot trailers capable of moving on rail flatcars.

"In a market that's down, domestic intermodal revenue and movements are actually increasing," Larkin says. "That speaks to shippers looking for less expensive, more sustainable alternatives. The growth of intermodal could accelerate as we look down the road at a truckload capacity shortage."

Intermodal transport's share of U.S. long-haul (550+ mile) movements of international and domestic containerized freight was estimated to be 13.3 percent in the fourth quarter of 2009, according to FTR Associates, up 0.2 percent from the third quarter and slightly above the previous high-water mark achieved in Q4 2008.

Regional

Last month, Schneider National announced plans to grow its regional driving fleet to 2,500 this year. Schneider's Rogers explains, "We've seen customers that want to have distribution centers within 500 miles of their store or end customer." Schneider traditionally was long-haul, he notes, but the company has grown the regional network tremendously over the last couple of years.

When he started this job two and a half years ago, Rogers says, about 5 to 10 percent of the business was regional. Now, he says, it's 25 to 30 percent of their freight, and the goal is to have about 50 percent of the freight running regional by the end of 2011.

"The same customers that had long-haul freight also had regional freight; we didn't have the ability to serve that in the past; now we do," Rogers says.